Sara Field, a 29-year-old Vancouver-based publicist, filed for bankruptcy seven years ago. Close to $30,000 in the hole, along with an additional $40,000 owing in student loans, she was completely overwhelmed. With no end from the calls from creditors and seemingly no way out, she thought it was her best bet. Looking back, she says it was the worst decision she ever made and the lack of financial independence and feelings of embarrassment haunt her to this day.
"For the first four or five months, I thought it was a great decision. The pressure was off my shoulders. I wasn't receiving calls from creditors and I thought my problems were solved. It wasn't until eight or nine months after filing that the reality of this choice set in. I couldn't get a line of credit, a credit card, or even a cell phone contract without a co-signer," says Ms. Field, who did not want her real name used.
Had she explored other options she likely would have been out of debt sooner, with a much shinier credit score, and a brighter financial future. The problem was she didn't think she had any options.
Twenty per cent of people who come through the Ontario offices of Hoyes Michalos & Associates will file. For the remaining 80 per cent, there's an alternative to be found. Bankruptcy should always be last on the list of options, according to bankruptcy trustee Doug Hoyes. What comes before? Mr. Hoyes lays out the alternatives below:
1. Do-it-yourself. The first question to ask is can I work this out on your own? A simple excel spreadsheet noting what comes in and what goes out will answer this question. Most people Mr. Hoyes sees don't have a budget or any idea what their financial picture looks like. Yours might not be as bad as you think and exploring ways of making more or spending less might just get your situation under control.
2. Consider consolidation. This won't reduce your debts, but it will reduce the interest that you are currently paying. Plus, you'll be responsible for just one payment as opposed to dealing with a number of creditors. Should you consolidate? You can run your numbers on an online debt consolidation calculator like this one to see the kind of difference it will make. Or use a debt options calculator to compare scenarios.
3. Debt Settlement. Debt settlement is best suited to someone who has debts that are relatively old. If it's been more than a year since you've stopped paying them, for example. The older they are, the more likely a creditor will be willing to accept some form of settlement. This option is rare though, according to Mr. Hoyes, because you need access to a lump sum of money to pay off creditors. If you're debt is $20,000, you might be able to settle for a payment of half that, which you would need to acquire in cash. You can try to negotiate on your own behalf with creditors or seek the advice of a professional.
4. Credit counselling. A consultation with a counsellor is free. Depending on your situation and the route you decide to take, fees will likely be involved and will vary. A credit counsellor will help you to formulate a debt-repayment plan where you pay your debts in full, but with no interest. They can also negotiate on your behalf. Ensure that any credit counsellor you decide to work with is part of a non-profit agency. A simple online search for "not for profit credit counselling" in your area will pull up a list of contacts. There are a number of options, such as Credit Counseling Services of Canada, Credit Canada, and Credit Counselling Society.
5. Consumer Proposal. A consumer proposal is a legal process and most people like to review all non-legal options listed above before they consider bankruptcy, according to Mr. Hoyes. In this case, a bankruptcy trustee will file a consumer proposal on your behalf to all of the people you owe money to. He or she will gather facts about your situation and how much you can afford to repay and then propose a repayment plan to your creditors. For example, if all parties agree that $200 a month over the course of four years is reasonable, then you create a repayment agreement.
If you have no assets, no surplus income and more debt than you can handle, filing for bankruptcy could in your case make sense. But for many people, bankruptcy should be a last resort. And if you can obtain guidance for free from a bankruptcy trustee or credit counsellor, then it might be smart to do so.
What causes anxiety and a feeling of helplessness is different for everyone. The road to fixing your financial picture will also be unique. Ms. Field says that over the years she's had several people come to her and ask her opinion on the subject. "I am adamant in relaying that unless you've exercised and explored every single option available you have, you're just not ready."